By DAVID MOON, Moon Capital Management
Although I should be used to it by now, I was shocked when I saw this year's
rate increase on our corporate medical insurance. Everyone at Moon Capital
Management is healthy (at least as far as I can tell) and we seldom actually use
the coverage. Why should our premiums increase almost 30 percent?
Then I realized we do not have medical insurance; we have a pre-paid medical
services plan. Insurance is the pooling of certain catastrophic risks
where the risk of loss is relatively minor, but the cost of any single loss
would be devastating. Insurance is not the pre-purchase of services you
know will consume. Consider life insurance. The odds of you dying
next year are relatively low, but the financial consequences are pretty steep:
you will never earn another dime. That is an insurable risk. The
odds of going to the doctor next year, however, are almost guaranteed.
Whether you live in a 30 year-old trailer with multi-colored Astroturf carpet
or a huge house on a hill, you do not insure your home against normal, expected
wear-and-tear. You insure your home against catastrophic losses like fire
or tornadoes. What we call 'medical insurance' today is the equivalent of
insuring your home against the wrong color paint. We have ten dollar
co-payments for doctor office visits. We get two dental checkups per year,
breath mints included. Routine physicals are covered. All of these
services are important -- but appear to be "free" to the patient. And
because the people who make the decision to purchase these services typically
have no immediate and obvious financial interest in the cost of the services, it
is easy to overutilize the medical system.
Imagine if your employer provided a pre-paid car wash plan. Local car washes
would be full everyday. Cars worth only a few hundred dollars would stay
sparkling clean, after receiving hundreds of dollars in "free" car washes each
year. Eventually, the increased volume at the car wash businesses would
require more employees and bigger facilities. Costs would increase.
So would the cost of car wash insurance. Someone has to pay for those free
Proper medical care is important, but every ailment does not justify a trip
to the doctor for a battery of tests. Our society expects the medical insurance
equivalent of crab cakes, when fish sticks are often much more efficient and
just as effective.
As a result of our short-term focus, we have given insurance companies (and
in the case of elderly and indigent, the government) the right to ration
healthcare services. In a normal market, consumers self-ration. That
discipline disappears when the consumer has no marginal cost associated with a
specific healthcare transaction. Doctors and hospitals are not
honeysuckles growing wild along the highway, seemingly unlimited in
supply. As long as healthcare resources are fixed, someone will always
ration healthcare. Sadly, the patient and the physician are minor
participants in that process today. If people really understood the
indirect costs involved, we might occasionally opt for the fish sticks -- or, at
least, not order so many crab cakes.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).